Local governments at the provincial and city level have come up with a slew of credit risk sharing policies to increase bank lending to small and medium-sized enterprises, amid the novel coronavirus outbreak.

The policies also seek to boost the banks' enthusiasm for lending by increasing their tolerance for potential nonperforming loans to small businesses for a temporary period.

The risk-sharing measures at the provincial level are also seen as a key measure by China to resume production and sustain economic development while containing the epidemic at the same time.

Credit risk refers to the possibility of a loss resulting from the borrower's failure to repay a loan or meet contractual obligations. It also refers to the risk that a lender may not receive the owed principal and interest, thereby resulting in strained cash flows and increased costs.

The municipal government of Shenzhen has raised the compensation ratio limit under its loan risk compensation scheme for new loans and extended loans offered by banks to small businesses between Feb 1 and June 30 from 50 percent to 80 percent. It has also expanded the scope of beneficiaries under the loan risk compensation scheme from micro, small and medium-sized enterprises to small business owners and individually owned businesses.

Preliminary estimates indicate that the total loan risk compensation will exceed 1 billion yuan ($142.6 million) this year, according to the Shenzhen Municipal Development and Reform Commission. The commission said State-owned Shenzhen High Tech Investment and Guaranty Co Ltd and Shenzhen Credit Guarantee Group Co Ltd will reduce or waive guarantee fees by 30 percent. The total guarantee fee waivers and reductions of the two firms are expected to be about 100 million yuan.

Sichuan has said that local governments at the city and county level in the province will cover part of the losses in case of bank loan defaults by small and medium-sized enterprises during the epidemic period. Besides, the provincial government will compensate 50 percent of the financial losses incurred by the governments at the lower levels.

Qingdao in Shandong province said on Feb 14 that its finance bureau will use credit risk compensation funds to cover 30 percent of the principal losses incurred by financial institutions due to certain loan defaults. Financial institutions had given small businesses loans toward working capital and technology transformation projects. Compensation for financial institutions would apply for each borrower's dues up to 10 million yuan.

The People's Bank of China, the central bank, said on Feb 26 that it would offer 500 billion yuan of relending and rediscount funding to help small banks provide low-cost funds to small and medium-sized enterprises and the agricultural sector, after it authorized a special relending quota of 300 billion yuan on Jan 31 to support activities directly linked with epidemic control of companies shortlisted by the authorities concerned.

By March 13, the PBOC had allocated 184 billion yuan of its 300-billion-yuan relending quota. Local banks, supported by the 500 billion yuan relending and rediscount program, had issued another 107.5 billion yuan of loans at favorable rates to small businesses and agricultural companies, said Sun Guofeng, head of the monetary policy department of the PBOC, at a news conference on March 15.